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RBI Proposes New NBFC Classification Rules
The Reserve Bank of India (RBI) is revising how it identifies Upper-Layer Non-Banking Financial Companies (NBFC-ULs). Classification will shift from a complex scoring model to a clear asset-size threshold of ₹1 lakh crore. The proposal also ends exemptions for government-owned NBFCs. This means entities like Power Finance Corporation (PFC), REC Limited, Indian Railway Finance Corporation (IRFC), and Housing & Urban Development Corp (HUDCO) will face stricter oversight, similar to private sector firms. This signals a move toward ownership-neutral regulation and greater transparency.
As of December 2025, PFC had assets of ₹12 lakh crore, REC over ₹6 lakh crore, IRFC nearly ₹5 lakh crore, and HUDCO about ₹1.3 lakh crore, all well above the proposed threshold.
PFC-REC Merger Faces New Regulatory Environment
The planned merger of PFC and REC is set to create a major power sector financier with a combined loan book exceeding ₹17 lakh crore. This consolidation, intended to boost scale and efficiency, will be subject to these new, stricter UL-NBFC regulations. The market reacted cautiously to the merger news, with both PFC and REC shares declining amid uncertainty over the swap ratio and potential equity dilution. Despite this, the merged entity will retain its 'government company' status, ensuring continued sovereign backing. Operational integration is progressing, with external consultants managing the process.
Valuation Gap Between State-Owned and Private NBFCs
Currently, PFC and REC trade at significantly lower P/E ratios than their larger, more diversified private sector counterparts. REC's P/E is about 5.34, with a market cap of ₹92,096.2 crore. IRFC has a P/E of around 18.69 and a market cap of ₹130,985.6 crore. HUDCO's P/E is about 12.4, with a market cap near ₹135,000 crore. In comparison, Shriram Finance trades at a P/E of 20.50-26.47, and Cholamandalam Investment and Finance at around 27.82, with market caps from ₹1.3-2.4 lakh crore. This valuation difference suggests state-owned firms are priced more conservatively, possibly due to perceived risks or their focused lending mandates. The PFC-REC merger aims to use its scale for better efficiency and investor appeal, although past PSU consolidations have seen mixed market reactions.
Regulatory Questions for Mid-Sized NBFCs and Integration Challenges
The RBI's proposal introduces uncertainty for firms whose asset bases are close to the ₹1 lakh crore mark. PNB Housing Finance, with an AUM of ₹71,243-₹80,397 crore as of early 2025, and Sammaan Capital, with an AUM around ₹62,378-₹64,200 crore, may be reclassified outside the Upper Layer. While a reduced regulatory burden might seem beneficial, it could also signal a lesser systemic importance. PFC and REC's history as separate entities, despite a holding structure, suggests potential integration challenges for the merger. This push for ownership-neutral regulation occurs as nimble fintech firms increasingly challenge traditional NBFCs. Under stricter oversight, large state-owned firms may face challenges staying agile compared to less regulated private competitors.
Outlook: Towards Unified NBFC Regulation
While specific forecasts for these state-owned entities are limited, the RBI clearly aims for a more unified, transparent, and predictable regulatory environment for all NBFCs. The annual review of the UL-NBFC list suggests ongoing adaptation. The inclusion of government entities indicates a move to treat all systemically important financial institutions equitably, regardless of ownership. The PFC-REC merger's success under this new regulatory regime will be a key test of the government's ability to execute large financial sector reforms.